The European Central Bank, in concert with national regulators, has asked recipients of the bank’s three-year liquidity facility, the long-term refinancing operation, how they intend to fund themselves without the bank’s support.

Senior bankers have told Financial News that the request was not formal but, coming only a week after a second round of lending under the facility, they said it was a surprise it had happened so quickly.

A senior debt capital markets banker who had previously told Financial News about his concern that accepting the ECB money could later be used by regulators as a way of intervening in areas such as compensation and dividends said he had expected such a move from regulators following the LTRO.

“This is the sting in the tail I’ve been worried about,” he said. “Who knows what else is coming down the line in terms of strings attached to the facility?”

Financial News asked the ECB if it had made such a request but a spokesman declined to comment.
One financial institutions capital markets banker said: “I’m surprised to see it happen so quickly.

The Bank of England wasn’t so quick to ask beneficiaries of the special liquidity scheme [under which banks could exchange mortgage-backed securities and other instruments for three-year Treasury bills] for their plans.”

The Bank of England would not comment on when it asked participants in the scheme about their exit plans.

Another financials specialist said the wholesale use of the LTRO by healthy banks across Europe explained the ECB’s haste. The facility was made available to every EU bank to avoid stigmatising those in greatest need.

He said: “Of course, the ECB wanted that kind of take-up to help shore up the European sovereign sector, but given that it’s so evident that many recipients didn’t really need the money it’s hardly unreasonable of regulators to ask them to account for their use of it.

“There’s also probably an element of pressure being exerted on them to show they’re putting it to good use.

And by good use they probably don’t mean parking it in the ECB’s own deposit facility, which it actually costs them money to do [as yields on deposits are 75 basis points below the 1% cost of participating in the LTRO].”